Linkfest: Week in Review

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By Barry Ritholtz
RealMoney.com Contributor
8/18/2007 5:35 PM EDT
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Now that was a wild, wild week -- the cherry on the cake of what's been a truly wild summer. The Fed's emergency discount rate cut was more symbolic than anything, and it restored if not liquidity than certainly some investor confidence. It also may be signaling a rate cut at the September FOMC meeting.

It turns out Fed Chairman Ben Bernanke is a bit of a closet technician. Why? Rumors of this action helped turn around the 340-point selloff Thursday -- when the Dow was off 1,500 points in less than 30 days, and the S&P 500 had traded down to its 200-day moving average. Intraday, the SPX touched the 12% mark for the correction, and the Dow industrials hit a minus-11% from its July 19th peak. (I do not believe either index actually closed past the 10% threshold.)

Funny how often these things turn right near key technical levels.

Let's review the week by the numbers. There wasn't a lot of green on the screen. U.S. Treasuries were up 0.8%, with crude oil close behind with a 0.7% increase. REITs managed to eke out a 0.4% gain, and the dollar, off more than 3% for the past year, tacked on 0.4%.

The losers? Well, pretty much everything else. The Russell 2000 slid 0.3%, while the S&P 500 lost half a percent for the week, even after a 2.5% jump on Friday. (Barron's noted this was the biggest one-day jump since April 2003.) U.S. junk bonds gave up 0.5%, and the Dow industrials lost 1.2%. The tech-laden Nasdaq declined 1.6%.

Even bigger losses were found overseas. That's no surprise, as most of those bourses had risen much higher than U.S. markets over the past few years. European stocks lost 0.8%, global stocks got smacked down 2.9% and emerging markets plummeted 8.2% on the week.

Barron's "The Trader" column asked:

JUST HOW DURABLE IS THIS BOUNCE, and has the market turned the corner? Traders looking for signs of a buyable panic point certainly saw evidence of anxiety. A whopping 1,106 stocks skidded to fresh 52-week lows on Thursday. The flight toward the safety of bonds sent the 10-year Treasury's yield plummeting 11.7% on Wednesday alone, only the sixth time ever that the yield has fallen more than 10% in a day, note researchers at Bespoke Investment Group.

But while the selloff has thinned the ranks of New York Stock Exchange stocks still holding above their 200-day moving averages, to just about 30% by Thursday, that figure had been lower before (and the anxiety it denotes more acute). That percentage had fallen to 15% before the stock market bottomed in 1998 and to 16% in 2002 -- a hint 'there was still room on the downside before a major oversold reading is recorded,' suggests Natexis Bleichroeder's John Roque.

There is lots of ground to cover today, and we got off to a late start. So let's get clicking!

INVESTING & TRADING

• The Panic of 2007.

• Jim Cramer and Doug Kass debate the end results of the Fed action on the The Wall Street Journal's MarketBeat blog: Saving the Market, or Postponing Doom?

• Speaking of our man Cramer, he is the subject of the cover story in this week's Barron's: Shorting Cramer. (If no Barron's subscription, then go here.)

• The escape of the enablers: When Wall Street fails, it inevitably asks for a handout. "Wall Street loves to talk about letting financial markets weed out the weak. But when the Street itself gets in trouble, it sticks out its little tin cup, asking for help. And gets it." (Fortune)

• The Quants Explain Disaster.

• Wall Street Mill Churns Out Bad Wurst: "A homeowner in Irvine, California, defaults on her mortgage; two Bear Stearns hedge funds implode. French banking giant BNP Paribas halts withdrawals from three of its investment funds; the world's central banks have to inject hundreds of billions of dollars into the money markets over a two-day period to keep interbank lending rates from soaring. Unrelated events? Hardly. What was once touted as a problem with a niche product (subprime loans) in a small sector of the U.S. economy (residential real estate) is somehow strewing its detritus across the globe." (Bloomberg)

• Ratings Agencies 2007 = Equity Analysts 2000 ?

• Fear makes a welcome return: "At particular times a great deal of stupid people have a great deal of stupid money ... At intervals ... the money of these people -- the blind capital, as we call it, of the country -- is particularly large and craving; it seeks for someone to devour it, and there is a 'plethora'; it finds someone, and there is 'speculation'; it is devoured, and there is 'panic'." --Walter Bagehot. (FT)

• Yen Carry Trade Unraveling Faster: "It is official. The much-celebrated global carry trade, revolving around the low cost of borrowing in yen (at interest rates barely above zero), is coming unwound in response to the global credit crisis. The money wheel is spinning in reverse, as the rise in the low-yielding yen is accompanied by sudden falls in various regional high-yielding currencies: the New Zealand dollar, the Australian dollar and, to a lesser degree, the Korean won." (Forbes)

• "Leverage is wonderful when asset prices are rising. It is a bear when asset prices start to retreat. It creates a vicious cycle. Both the sinners and the sacred get got in the undertow." -- Paul Kasriel on Leverage.

• Wonder who lost the most money, reputation or power this month? Read Bonfire of the vanities: the fortunes and reputations that have gone up in smoke.

• How a hedge fund star lost it all: "His loss of $1.6 billion of investors' money is the biggest hedge fund collapse this year. Much of it occurred during a few frantic days in July, when a meltdown in the subprime mortgage market triggered a shock wave that caused the values of many debt securities, like those held by Sowood, to drop sharply. Larson suddenly did not have enough money to repay his lenders, and he was forced to dissolve the fund. He sold off the remnants and closed Sowood on July 30." (The Boston Globe)

• Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch.

• How To Speak Hedgie. Amusing commentary from Slate.

FEDERAL RESERVE

Lots of Fed action this week, and commentary also:

• Fed Offers Banks Loans Amid Crisis: The Federal Reserve took highly unusual steps Friday to open up the supply of cash to the nation's banks and signaled a willingness to cut interest rates if necessary, at a time when some of the safest financial markets are seizing up and threatening the broader economic outlook. (The Wall Street Journal)

• More on the Fed's Discount Window Action. The Wall Street Journal's Real Time Economics blog explains: "In making it easier for banks to borrow from the its 'discount window' the Fed is exploiting a little-used central bank tool to calm markets, though one with limitations in the current crisis."

• The "Greenspan Channel".

• Bernanke's Rate Cut Restores Volcker Tradition: "August 17, 2007, marks the return of traditional central banking at the U.S. Federal Reserve under Chairman Ben Bernanke. By cutting the discount rate -- and not the overnight federal-funds rate target -- the Fed has gone back to the classic function for which central banks are created: to act as lender of last resort to troubled lenders who cannot obtain funding in the market." (Barron's)

• The Fed acts: 'Lipstick on a pig', or timely rescue? Six views... (FT)

• Bernanke Sees Lesson in the Depression: "Whether the Fed was primarily responsible for the severe and sustained economic contraction of the 1930s, as asserted by economists Milton Friedman and Anna Schwartz, or just bears partial responsibility, is still a subject of lively debate among economic historians almost 80 years after the fact." (Bloomberg)